Thursday, May 12, 2011

Best Passages from Peter Lynch's Beating the Street: Part 3

OK, let's wrap this up:
  • I don't think of [shopping] as browsing. I think of it as a fundamental analysis on the intriguing lineup of potential investments, arranged side by side for the convenience of stock shoppers.
  • The very homogeneity of taste in food and fashion that makes for a dull culture also makes fortunes for owners of retail companies and of restaurant companies as well. What sells in one town is almost guaranteed to sell in another.
  • You want to avoid the retailers that expand too fast, especially if they're doing it on borrowed money.
  • As a rule of thumb, a stock should sell at or below its growth rate.
  • Digging where the surroundings are tranquil and pleasurable may prove to be as unrewarding as doing detective work from a stuffed chair. You've got to go into places where other investors and especially fund managers fear to tread, or, more to the point, to invest.
  • Reading a prospectus is like reading the fine print on the back of an airline ticket. Most of it is boring, except for the exciting parts that make you never want to get on an airplane or buy a single share of stock again.
  • Whenever book value comes up, I ask myself the same question we all ask about the movies: is this based on a true story or is it fictional?
  • In a highly leveraged company, bank debt is dangerous, because if the company runs into problems the bank will ask for its money back.
  • I'm always on the lookout for great companies in lousy industries. A great industry that's growing fast, such as computers or medical technology, attracts too much attention and too many competitors. When an industry gets too popular, nobody makes money there anymore.
  • In a lousy industry, one that's growing slowly if at all, the weak drop out and the survivors get a bigger share of the market.
  • Peter's principle #16: In business, competition is never as healthy as total domination.
  • The greatest companies in the lousy industries share certain characteristics. They are low-cost operators, and penny-pinchers in the executive suite. They avoid going into debt. They reject the corporate caste system that creates white-collar Brahmins and blue-collar untouchables. Their workers are well paid and have a stake in the companies' future. They find niches, parts of the market that bigger companies have overlooked. They grow fast--faster than many companies in the fashionable fast-growth industries.
  • Peter's principle #17: All else being equal, invest in the company with the fewest color photographs in the annual report.
  • Peter's principle #18: When even the analysts are bored, it's time to start buying.
  • I never hang up on a source without asking: what other companies do you most admire?
  • This is the way you look at a long-shot S&L: find out what the equity is and compare that to the commercial loans outstanding. Assume the worst.
  • Buying on the bad news can be a very costly strategy, especially since bad news has a habit of getting worse.
  • Buying on the good news is healthier in the long run, and you improve your odds considerably by waiting for the proof.
  • This is a very useful year-end review for any stockpicker: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can't find such a reason, the next question is: why do I own the stock?
  • Owners can always give you a reason their horses will win, and they are wrong 90 percent of the time.
  • A high p/e ratio, which with most stocks its regarded as a bad thing, may be good news for a cyclical. Often, it means that a company is passing through the worst of the doldrums, and soon its business will improve, the earnings will exceed the analysts' expectations, and fund managers will start buying the stock in earnest.
  • It's perilous to invest in a cyclical without having a working knowledge of the industry and its rhythms.
  • The most important question to ask about a cyclical is whether the company's balance sheet is strong enough to survive the next downturn.
  • One useful indicator for when to buy auto stocks is used-car prices. When used-car dealers lower their prices, it means they're having trouble selling cars, and a lousy market for them is even lousier for the new-car dealers.
  • In the stock market it rarely pays to take yesterday's news too seriously, or to hold an opinion too long.
  • Peter's principle #20: Corporations, like people, change their names for one of two reasons: they've gotten married, or they've been involved in some fiasco that they hope the public will forget.
  • A simple way to make a nice living from troubled utilities: buy them when the dividend is omitted and hold on to them until the dividend is restored.
  • There are always respected investors who say that you're wrong. You have to know the story better than they do, and have faith in what you know.
  • For a stock to do better than expected, the company has to be widely underestimated. Otherwise, it would sell for a higher price to begin with. When the prevailing opinion is more negative than yours, you have to constantly check and recheck the facts, to reassure yourself that you're not being foolishly optimistic.
  • Here's the key question to ask about a risky yet promising stock: if things go right, how much can I earn?
  • There are different shades of buys. There's the "what else am I going to buy?" buy. There's the "maybe this will work out" buy. There's the "buy now and sell later" buy. There's the "buy for your mother-in-law" buy. There's the "buy for your mother-in-law and all the aunts, uncles, and cousins" buy. There's the "sell the house and put the money into this" buy. There's the "sell the house, the boat, the cars, and the barbecue and put the money into this" buy. There's the "sell the house, boat, cars, and barbecue , and insist your mother-in-law, aunts, uncles, and cousins do the same" buy.
  • During periods when mutual funds are popular, investing in the companies that sell the funds is likely to be more rewarding than investing in their products.
  • A healthy portfolio requires a regular checkup.
  • Rejecting a stock because the price has doubled, tripled, or even quadrupled in the recent past can be a big mistake. Whether a million investors have made or lost money on Chrysler last month has no bearing on what will happen next month. I try to treat each portential investment as if it had no history--the "be here now" approach. Whatever occured earlier is irrelevant. The important thing is whether the stock is cheap or expensive today at $21-$22, based on its earnings potential of $5 to $7 a share.
  • You can beat the market by ignoring the herd.
  • Behind every stock is a company. Find out what it's doing.
  • YOu have to know what you own and why you own it.
  • Long shots almost always miss the mark.
  • Everyone has the brainpower to make money in stocks. Not everyone has the stomach.

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